Breakouts galore

L.A. Little, a professional money manager trading his own accounts while
managing investment funds for qualified investors, is the author of three books (Trade Like the Little Guy, Trend
Qualification and Trading, and Trend Trading Set-Ups) and has written extensively for many popular publications, such as Stocks and Commodities, Active Trader, TheStreet.com, RealMoneyPro.com and Minyanville.com. He writes daily on his website
Technical Analysis Today, which offers
tools and services that implement the concepts he espouses,
and can be reached at tat@tatoday.com.

One of the questions that always surfaces when a market makes a move like the one we have just witnessed is whether it will last or not. Since I programmatically determine the qualified trend for all equities nightly, I am in the catbird’s seat when it comes to witnessing the magnitude and lasting power of a move when it occurs.

For example, the huge moves in the indexes that occurred on the last day of 2012 and the first day of 2013 yielded a huge number of bullish trend transitions. Not all of these transitions resulted in 52-week highs, which is what most people use to measure a move’s "breadth," but since a trend transition is almost always a breakout, measuring these transitions provides a broader picture of market breadth.

Although I have more research to do in this area of breakout breadth and what it implies about market health and continuance, the breakouts that occurred on two wide price-spread bars that brought in the new year were significant, and what work I have done to date suggests that when many breakouts occur simultaneously, the move typically is very sticky (which is what we are seeing) and carries farther before suffering a retrace of any decent size.

So when I look at a chart of the small caps, for example, my expectation is that we will not get much of a retrace before powering higher and completing the ABCD pattern that has formed on this chart, and all the other indexes as well. In fact, a retrace back to slightly test the gap area is all I would expect. The ABCD patterns project about 3% to 4% higher from here across all the indexes including the Russell 2000 as seen in via the iShares Russell 2000 proxy
IWM, +0.32%

But one doesn't have to settle for 3% or 4% gains, since there is almost always more to be made in individual stocks when compared with the indexes. The problem, of course, is picking those winners out of the pack of stocks available and then dancing around the earnings parade that is about to hit once more.

To accomplish the selection process, I have a couple of tools I have built at my disposal. One such tool is the Trading Cube Scanner, which is built on top of qualified trends and cumulative mean-time-to-failure (MTTF) rates.

Since a trend can be treated like a light bulb with a starting and ending point and a useful life cycle in between, a scan that searches for those stocks that have just began their bullish trends on both the short- and intermediate-term time frames provides a great starting point for someone looking to trade this surging market.

So, to that end, here is a pointer to a list of stocks that meet two criteria: the stock is bullish on all three time frames and the cumulative MTTF is 15% or less on the short-term time frame and 20% or less on the intermediate-term time frame.

Why these numbers? Well, it's pretty simple. If the general market is strong and most sectors are strong, then the direction you want to point is for higher prices. The scan described above will find those stocks that are bullish and recently transitioned to that state on both the short- and intermediate-term time frames — in other words, they broke over swing points on both the short- and intermediate-term time frames.

Now this is just one way to find a list of potential stocks to trade in the latest bull move. There are others. One could only look for those that are confirmed bullish with respect to their trend for example, or other variations. This happens to be a very good scanning criterion at this particular point in this market since it narrows the list of candidates to a small subset of the universe of stocks and guarantees that you are looking at those that are witnessing powerful moves which, importantly, have just begun. It doesn't imply that they are a buy at the current price point, but instead says here's a list of stocks that are moving in the direction of the trend, and they have just started that move in the larger scheme of things.

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